7 Reasons HP Is Bad for 3D Printing Companies

3D printing stocks have soared in the last couple years, but especially in the last month. Companies such as 3D Systems (NYSE: DDD) , Stratasys (NASDAQ: SSYS) , ExOne (NASDAQ: XONE) , and the newest addition Voxeljet (NYSE: VJET) are now priced for operational perfection. However, with Hewlett-Packard (NYSE: HPQ) entering the space, should investors of these momentum stocks be worried that the bubble is about to burst?

A Quick Glance The concept of 3D printing is quite simple: Consumers can buy printers of different sizes, add materials, and then create actual objects. These objects can range from décor to furniture and even massive industrial products. Essentially, there are no limits.

3D Systems and Stratasys are the two largest publicly traded companies in the space. 3D Systems sells mostly consumer models, meaning smaller printers at a high quantity. Stratasys is diversified with printers of all sizes, in a cost range between $10,000 and $600,000 per unit.

Then, there is another class of 3D printing companies that include ExOne and Voxeljet. ExOne operates in the industrial space with large printers that cost more than $1 million per unit. Hence, ExOne does not have high volume, but investors hope that more industrial companies will elect to use such devices to save on long-term costs.

Voxeljet is newest to the group, becoming a public company last month and also operating in the industrial space. Voxeljet is a great example of the excitement and somewhat irrational exuberance that plagues this space. The company's IPO was priced at a midpoint of $14 on October 18, but today it trades over $50, representing a market cap of $700 million. However, the company has annual sales of just $11 million with a backlog of only $5.7 million according to its S-1.

A bubble forming Unfortunately for investors, it's not just Voxeljet that's trading at a large premium to fundamentals. Take a look at how its peers measure in terms of market capitalization to annual revenue.

Company

Price/Sales

3D Systems

15.7

Stratasys

14.3

ExOne

21.8

Voxeljet

63.3

Clearly, these four companies are illustrating bubble-like valuations. This fact doesn't mean that all of these stocks can't continue to soar. In fact, these stocks might all increase another 100%. However, sooner or later, as with all bubbles, some event will come along that will cause the bubble to burst.

Consequently, investors need to realize that this unknown event might actually be in the making. Last month the massive technology company Hewlett-Packard (HP), known for its printers, announced that it would be entering the 3D printer space by mid-2014 and would concentrate on affordability and speed.

A bubble about to burst? Strangely, it was HP's entrance announcement that has helped to push the industry's elite higher over the last month. HP's CEO Meg Whitman suggested plans to enter the space via acquisitions. This has led many to believe that 3D Systems, Stratasys, etc. might be targets. Yet, while 3D printing investors want to bet, and pay a high premium, on this assumption, there are more than a few reasons why HP's entrance could be bad news for current 3D investors. Here are five:

As the world's largest technology company, HP clearly has 1) more resources and a 2) larger distribution network than any individual company in the 3D printing space. HP has a presence in nearly all countries around the globe with more than 330,000 employees. 3D Systems has roughly 1,000 employees and not nearly enough resources to produce products at the same rate of HP.

With more resources and a larger distribution network comes 3) pricing power. 3D Systems made news last week after announcing a $399 scanner, but conventional wisdom suggests that HP could price the same product much cheaper. Also, with 3D Systems having operating margins close to 20% compared to HP's 8%, HP can afford to be more aggressive with pricing without sacrificing margins. If 3D Systems does the same, investors might flee (same for Stratasys).

HP might acquire in order to have an established 3D printing business with patents, but HP will have the ability to invest in R&D to create better products at a faster rate. In fact, HP spent $3.4 billion on R&D in 2012 alone; that's more than three times the annual revenue of 3D Systems, Stratasys, ExOne, and Voxeljet combined! Simply put, 4) HP can spend money that its competitors can't match, and it will not hurt HP's business.

HP has $13.3 billion in cash to make acquisitions. Some investors think HP is eyeing one of the four noted 3D printing companies discussed. However, there's a reason that Stratasys acquired Makerbot and 3D Systems has grabbed 38 companies over the last two years in the private market. The reason is because private companies are cheaper.

With that said, there are two elements to this argument: 5) HP not acquiring any of the noted companies could drive stock prices lower and 6) HP acquiring in the private market could boost asking prices from private companies. The latter would slow acquisitions, affecting top-line growth.

One for the road And the last reason that HP's entrance into the space is bad for publically traded 3D printing companies is because 7) HP is significantly cheaper.

This final argument really seals the deal for current shareholders of 3D printing companies, as HP trades at just 0.44 times sales, far cheaper than its soon-to-be peers. With the 3D printing market valued at just $3 billion, this space is not going to make-or-break HP. However, if analysts are right and the space grows to $6 billion by 2016 and $10 billion by 2020, then 3D printing could be a major piece of the HP puzzle. Also, it could be a major growth driver.

Either way, when it's all said and done, none of these points are good for the current flock of 3D companies. Given their respective valuations, none are priced for these risks, and this could signal the bursting of this bubble, and it's all thanks to HP.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, ExOne, and Stratasys. The Motley Fool owns shares of 3D Systems, ExOne, and Stratasys and has the following options: short January 2014 $20 puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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While this article makes some good points, I remain unconvinced. We would all do well to remember HP's results over the last few years. While they seem to be rebounding, it is clear that for a while they were stumbling badly in sectors of the technology market that they had previously dominated. With that in mind, I think it is a bit generous to consider them invincible - an irresistible force - in a part of the technology market where they have less experience than all of the other companies mentioned. Clearly they have valuable resources of many kinds that will be helpful in 3D printing. However, I think it is premature to proclaim the inevitability of their victory.

HP is not even performing that well in their core competency business. Why should we expect that they are going to light the 3D world on fire? Obviously, they will have to buy their expertise through acquisition as stated by Meg Whitman. I believe, if anything, this bodes well for DDD and SSYS in particular. These companies are the cream of the crop (VJET should also do well) and are definitely takeover targets. I expect them to perform exceptionally with or without HP.

But the number of employees, factories and dollars HP has in 3D printing right now is exactly ZERO. They are way behind (many years behind) and might never catch up without a huge acquisition of SSYS or DDD. IMHO it is an almost certainty that if they have any hope of competing, they need an acquisition target, and a big one at that.

Regardless of what HP decides it needs to do to enter this market, it's a very smart decision by them.

Announcing it loudly - it certainly gives an extra short-term boost to all the public competition, but that will fade soon as HP displays some products, or buys up its first small private company.

And it also might dissuade some other potential competition from even entering this market. As this new disseminates, HP should become the hot stock of the Dow for the next 5-8 months. It has all the catalysts for a great comeback story.

It's not that 3D printing will be a core driver for HP, or that HP doesn't suck, but rather they do have the resources to make the acquisiition landscape more difficult and to cause significant disruption. They can afford to price printers much cheaper and in a larger connected network. DDD, SSYS, and company are all in infancy. HP is mature.